Marshall & Ilsley Bank
Marshfield Area Chamber
Of Commerce & Industry’s
Marshfield Economic
Development Association
MARSHFIELD AREA
2008
ECONOMIC INDICATORS
2nd Quarter 2008
presented
September 19, 2008
Presented by:
Central Wisconsin Economic Research Bureau
Randy F. Cray, Ph.D., Professor of Economics and Director of the CWERB
Scott Wallace, Ph.D., Associate Professor of Economics and Research
Associate of the CWERB
Sarah J. Bauer, Research Assistant
Special Report: Beyond the Sound Bites: The Real Economic Programs of John McCain
and Barack Obama.
Kevin Neuman, Ph. D., Assistant Professor of Economics – University of Wisconsin
Stevens Point.
TABLE OF CONTENTS
National and Regional Outlook
Table 1
1
Central Wisconsin
Tables 2-6
4
Marshfield Area
Tables 7-15
15
Special Report
Beyond the Sound Bites:
The Real Economic Programs of
John McCain and Barack Obama
30
Association for University
Business and Economic
CWERB - Division of Business and Economics
University of Wisconsin-Stevens Point
Stevens Point, WI 54481
715/346-3774 715/346-2537
www.uwsp.edu/business/CWERB
National and Regional Outlook
Based upon the nation’s GDP growth in second quarter 2008 one might conclude
that the national economy is performing nicely. For example real GDP grew by an
annualized 3.5 percent during the April - June time frame. However, other economic
indicators suggest that the economy is having a much harder go of it. For example, the
national unemployment rate has been trending upward since early 2007 and by July
2008 reached 5.7 percent. Given the mixed message sent by GDP and the
unemployment rate, I would like to explore the matter further and discuss other
variables that will give us insight into the health and condition of the economy.
As most everyone knows our current economic situation has been and will
continue to be heavily influenced by the collapse of the sub-prime housing market.
Many economists believe that it will be well into 2009 before the effects of the sub-prime
housing market collapse on homeowners and its impact on the nation’s financial
institutions cease to be a drag on the economy. Current housing indicators show that
prices continue to tumble across the nation. Since mid 2007 housing prices have fallen
each and every month. New single family housing starts have declined from about 1.4
million starts in July 2006 to 0.6 million starts in July 2008. Sales of existing homes in
July 2006 were about 5.5 million units; by July 2008 only about 4.4 million homes were
being sold. The contraction in housing activity hurts not only the construction sector,
but the entire economy as well. For an excellent discussion of this one should read
Kevin Bahr’s CWERB special report from May 2008. In the report he details the
economic relationships among the housing market, homeowners, financial institutions
and the overall economy.
Other indicators of economic performance such as industrial production, capital
investment, manufacturing, motor vehicles and parts, the stock market, consumer price
index, and energy costs all suggest that the economy is doing more poorly than what
the GDP figure alone says about the situation. Perhaps most importantly, employment
at the national level has contracted by about 700,000 jobs since June 2007. Thus, it
becomes apparent as to why most people feel that the economy is doing more poorly
than what the GDP figure suggests.
Given that the economy is now experiencing inflationary pressures and rising
unemployment, the job of the Federal Reserve has become much more difficult than in
past years. Our nation’s central bank must carefully weigh the risks of providing more
liquidity and lower interest rates to stimulate economic growth against the inflationary
pressure that this action would surely cause. Until very recently the Federal Reserve
felt the greatest danger to the economy was recession. The Federal Reserve acted
very aggressively in lowering interest rates and providing needed liquidity to ailing
financial institutions. The stance of the Federal Reserve has changed to a degree. Our
nation’s central bank’s monetary policy has shifted to a more neutral position. The FED
now recognizes that inflationary pressure, even though inflation is expected to recede in
the months ahead, needs to be monitored closely. Thus, it is unlikely the Federal
Reserve will make a dramatic move to reduce interest rates in the months ahead.
1
Economic growth would have to take a huge nose dive before the Federal Reserve will
provide more liquidity to the economy. On the fiscal policy front the tax rebate checks
seemed to have had a smaller than hoped for impact on consumer spending. If the
economy appears to be faltering we may very well see another round of rebate checks
from Washington. But, until the housing market, consumer finances, and financial
institution balance sheets become healthy the economy will continue to struggle.
2
TABLE 1
NATIONAL ECONOMIC STATISTICS
2007
2008
Second Quarter Second Quarter
Percent
Change
Nominal Gross Domestic
Product (Billions)
$13,768.8
$14,256.5
+3.5
Real Gross Domestic
Product (Billions of 2000 $)
$11,520.1
$11,700.6
+1.6
Industrial Production
(2002 = 100)
111.4
111.7
+0.3
Three Month U.S. Treasury
Bill Rate
4.69%
1.90%
-59.4
Consumer Price Index
(1982-84 = 100)
208.4
218.8
+5.0
3
Central Wisconsin
The unemployment rates are generally lower in Central Wisconsin compared to a
year ago. In addition, total employment, whether measured by the survey of
households or measured from employer payroll records, indicates an expansion in the
number of jobs. Sales tax collections, however, were well off the pace of a year ago.
This is especially true if the numbers are adjusted for inflation. Finally, regional
business executives believe the economy is much weaker than it was a year ago.
The CWERB Table 2 shows that unemployment rates for second quarter 2008
were lower than in second quarter 2007. The unemployment rate fell from 4.9 to 4.8
percent in Marathon County, from 5.3 to 5.1 percent in Portage County, and 6.1 to 5.6
percent in Wood County. This comes as a pleasant surprise. Moreover, Wisconsin’s
unemployment rate contracted from 5.3 to 4.9 percent. The national unemployment
rate, however, rose sharply from 4.7 to 5.7 percent. It is clear that the local area
economy has held up well when compared to the nation.
Additional good news comes from Table 3. Total employment in Central
Wisconsin is estimated to have grown from 149.8 to 150.3 thousand over the past
twelve months, a small, but respectable 0.3 percent change. Given the weakness of the
national economy any gains in employment are to be appreciated. From second
quarter of last year Wisconsin added about 14 thousand people to its payrolls,
meanwhile the U.S. lost approximately 308 thousand jobs.
The state of Wisconsin also estimates employment by collecting data from
business establishments and government units. Over the past twelve months nonfarm
employment in Central Wisconsin grew by a small but positive 0.3 percent. Sectors of
the economy experiencing growth were financial activities, education & health services,
leisure & hospitality, and information & business services. However, other sectors like
construction & natural resources, manufacturing, trade, transportation & utilities, and
total government lost employment.
County sales tax data are used to judge the strength of the local economic
scene. Collections in Portage County declined by approximately 7.9 percent since
second quarter 2007. Likewise Wood County sales tax collections are estimated to
have declined by 9.5 percent for the period. Marathon County collections were up by a
scant 0.6 percent. Given that the inflation rate for the past twelve months was 5.0
percent, the real inflation adjusted collections for all three counties are much weaker
than what they first appear. In sum, retail economic activity may have been fairly weak
when compared to a year ago.
The CWERB survey of business executives is presented in Table 6. This group
believes that recent changes in economic conditions, whether of the national or local
level, have deteriorated from a year ago. They were somewhat more upbeat about
future economic conditions at the nation level, local level, and for their particular
4
industry. In other words they felt that economic matters would not become appreciably
worse and that the economy was beginning to stabilize.
5
TABLE 2
UNEMPLOYMENT IN CENTRAL WISCONSIN
Unemployment
Rate
June 2007
Unemployment
Rate
June 2008
Percent
Change
Portage County
5.3%
5.1%
-3.9
City of Stevens Point
6.4%
6.5%
+1.6
Marathon County
4.9%
4.8%
-0.9
Wood County
6.1%
5.6%
-7.1
Central Wisconsin
5.3%
5.1%
-3.8
Wisconsin
5.3%
4.9%
-6.7
United States
4.7%
5.7%
+21.4
TABLE 3
EMPLOYMENT IN CENTRAL WISCONSIN
Total Employment
June 2007
(Thousands)
Total Employment
June 2008
(Thousands)
Percent
Change
Portage County
38.9
40.1
+3.2
City of Stevens Point
13.6
13.9
+2.9
Marathon County
72.9
71.7
-1.7
Wood County
38.0
38.5
+1.3
Central Wisconsin
149.8
150.3
+0.3
Wisconsin
2,965.4
2,979.3
+0.5
United States
146,957
146,649
-0.2
* Percent change figures reflect data before rounding
6
TABLE 4
CENTRAL WISCONSIN EMPLOYMENT CHANGE BY SECTOR
Employment
June 2007
(Thousands)
Employment
June 2008
(Thousands)
Percent
Change
Total Nonfarm
154.0
154.5
+0.3
Total Private
135.7
136.4
+0.5
Construction & Natural Resources
6.7
5.9
-11.5
Manufacturing
28.8
27.4
-4.8
Trade
25.3
24.5
-3.1
Transportation & Utilities
8.3
8.1
-2.2
Financial Activities
11.6
12.0
+3.8
Education & Health Services
23.2
24.2
+4.4
Leisure & Hospitality
13.2
14.0
+6.4
Information & Business Services
18.8
20.1
+6.9
Total Government
18.3
18.1
-1.1
Sales Tax
2007
Second Quarter
(Thousands)
Sales Tax
2008
Second Quarter
(Thousands)
Percent
Change
Portage County
$1,301.3
$1,198.3
-7.9
Marathon County
$2,674.8
$2,692.0
+0.6
Wood County
$1,289.2
$1,166.9
-9.5
TABLE 5
COUNTY SALES TAX DISTRIBUTION
* Percent change figures reflect data before rounding
7
TABLE 6
BUSINESS CONFIDENCE IN CENTRAL WISCONSIN
Index Value
March 2008
June 2008
Recent Change in National
Economic Conditions
26
30
Recent Change in
Local Economic Conditions
29
32
Expected Change in
National Economic Conditions
50
50
Expected Change in
Local Economic Conditions
46
47
Expected Change in
Industry Conditions
51
50
100 = Substantially Better
50 = Same
0 = Substantially Worse
8
FIGURE 1
9
FIGURE 2
10
FIGURE 3
11
FIGURE 4
12
FIGURE 5
13
FIGURE 6
14
Marshfield
A summary of the Marshfield results is as follows. Total nonfarm employment
rose by approximately 1.0 percent. Retailer confidence about the future direction of
store sales and traffic remains glum. Help wanted advertising has picked up over the
past twelve months. However, unemployment claims in the county have risen
substantially over the same period. Surprisingly, construction activity is generally above
the levels of 2007.
Wood County industrial sector employment is presented in Table 7. The national
economy has lost hundreds of thousands of jobs since last year. However, employment
in Wood County expanded by approximately 1.0 percent during the same period. Wood
County employment sectors that experienced growth were transportation & utilities,
education & health services, leisure & hospitality, and information & business services.
Sectors that declined in employment were construction & natural resources,
manufacturing, trade, financial activity, and government. The decline of 500 positions in
manufacturing was the most negative aspect of the results.
The CWERB survey of local merchants is given in Table 8. This group believes
total sales were slightly ahead of last year’s pace, but store traffic was perceived to be
about the same as a year ago. When they were asked about the future they indicated
that sales and store traffic compared to a year ago at the same time would be lower for
their establishment.
Help wanted advertising is displayed in Table 9 for the Marshfield area.
Economists use help wanted advertising as a barometer of future labor market
conditions. The index rose from 86 to 92 over the past twelve months, a 7 percent
increase in local advertising. The U.S. index, however, fell from 27 to 17 over the past
twelve months, a decline of 37 percent. It is widely understood that web based job
advertising has been displacing newspaper help wanted advertising. But most
economists still believe that help wanted advertising serves a useful role in forecasting
labor market conditions.
Tables 10 and 11 give the reader insight into the amount of family financial
distress being experienced in the county. Public assistance claims in Marshfield were
virtually unchanged from a year ago, declining from 79 to 78. However, unemployment
claims data on a county wide basis shows that new unemployment claims rose from
212 to 251 or by 18.4 percent. Likewise, total claims climbed from 1,339 to 1,499 or by
11.9 percent. This strongly suggests that layoffs in the southern part of Wood County
are having a huge influence on the numbers.
Table 12 shows that residential construction in second quarter 2008 was
substantially above the total for 2007. The number of new residential permits increased
from 2 to 9 and the estimated value of the construction rose from $585 thousand to $2.3
million dollars. The number of residential alteration permits also increased. The
15
number of permits went from 43 to 56. However, the estimated value of the alteration
activity actually declined from $1.5 million to $474 thousand.
The nonresidential construction figures are presented in Table 13 without
percentage changes. Due to the large scale nature of these projects the number can be
very volatile thus reducing the value of presenting percentage changes. The number of
permits rose from 1 to 4 over the course of the year. The estimated value of the new
permits climbed from $300 thousand to $1.7 million. Business alteration permits fell
from 29 to 23 and the value of the alteration activity rose from $4.8 million to $5.6
million. In sum, nonresidential construction activity in the Marshfield area was stronger
this year when it is compared to last year’s totals.
Table 14 and 15 present Clark County economic data. Clark County’s total
nonfarm employment grew by 3.9 percent from June 2007 to June 2008. Total
employment in Clark is estimated to have expanded by 5.2 percent over the same time
frame. In addition, the unemployment rate fell from 5.4 percent to 4.8 percent. By in
large the June 2007 to June 2008 time frame was a period of expansion for Clark
County.
16
TABLE 7
WOOD COUNTY EMPLOYMENT CHANGE BY SECTOR
Employment
June 2007
(Thousands)
Employment
June 2008
(Thousands)
Percent
Change
Total Nonfarm
43.6
44.0
+1.0
Total Private
38.2
38.7
+1.4
Construction & Natural Resources
1.9
1.4
-28.4
Manufacturing
6.3
5.8
-8.7
Trade
5.5
5.3
-3.1
Transportation & Utilities
3.9
4.0
+1.6
Financial Activities
1.2
1.2
-2.6
Education & Health Services
10.8
11.7
+8.4
Leisure & Hospitality
3.3
3.3
+1.0
Information & Business Services
5.4
6.1
+13.7
Total Government
5.4
5.3
-1.9
TABLE 8
RETAILER CONFIDENCE IN MARSHFIELD*
Index Value
March 2008
June 2008
Total Sales Compared
to Previous Year
46
59
Store Traffic Compared
to Previous Year
40
50
Expected Sales Three
Months From Now
46
45
Expected Store Traffic
Three Months From Now
42
45
100 = Substantially Better
50 = Same
0 = Substantially Worse
* Data collected by UW Marshfield-Wood County
17
TABLE 9
HELP WANTED ADVERTISING IN MARSHFIELD
Index Value
2007
2008
Marshfield
(June)
1980=100
86
92
U.S.
(May)
1987=100
27
17
TABLE 10
PUBLIC ASSISTANCE CLAIMS IN WOOD COUNTY
2007
Second Quarter
(Monthly Avg.)
Total Caseload
79
18
2008
Second Quarter
(Monthly Avg.)
Percent
Change
78
-1.3
TABLE 11
UNEMPLOYMENT CLAIMS IN WOOD COUNTY
2007
2008
Second Quarter Second Quarter
(Weekly Avg.)
(Weekly Avg.)
Percent
Change
New Claims
212
251
+18.4
Total Claims
1339
1499
+11.9
TABLE 12
RESIDENTIAL CONSTRUCTION IN MARSHFIELD AREA*
2007
2008
Second Quarter Second Quarter
Residential Permits Issued
Percent
Change
2
9
+350.0
$585.0
(thousands)
$2,346.2
(thousands)
+301.1
Number of Housing Units
2
9
+350.0
Residential Alteration
Permits Issued
43
56
+30.2
$1,492.5
(thousands)
$474.0
(thousands)
-68.2
Estimated Value of
New Homes
Estimated Value
of Alterations
* Data collected by UW Marshfield-Wood County
19
TABLE 13
NONRESIDENTIAL CONSTRUCTION IN MARSHFIELD AREA*
2007
2008
Second Quarter Second Quarter
Number of Permits Issued
Estimated Value of
New Structures
Number of Business Alteration Permits
Estimated Value
of Business Alterations
* Data collected by UW Marshfield-Wood County
20
1
4
$300.0
(thousands)
$1,735.0
(thousands)
29
23
$4,846.6
(thousands)
$5,575.7
(thousands)
FIGURE 7
21
FIGURE 8
22
FIGURE 9
23
FIGURE 10
24
TABLE 14
CLARK COUNTY EMPLOYMENT BY SECTOR
June 2007
June 2008
Percent Change
Total Nonfarm
11.5
11.9
+3.9
Total Private
9.5
10.1
+5.9
Construction & Natural Resources
0.8
0.6
-20.8
Manufacturing
3.2
3.4
+5.5
Trade
1.7
1.6
-4.8
Transportation & Utilities
0.6
0.7
+15.8
Financial Activities
0.3
0.3
-10.0
Education & Health Services
1.6
1.9
+16.0
Leisure & Hospitality
0.6
0.6
-0.3
Information & Business Services
0.8
1.0
+26.5
Total Government
2.0
1.9
-5.7
TABLE 15
CLARK COUNTY EMPLOYMENT STATISTICS
June 2007
June 2008
Percent Change
5.4%
4.8%
-11.3
Total Employed
17,737
18,657
+5.2
Total Unemployed
1,014
940
-7.3
Labor Force
18,751
19,597
+4.5
Unemployment Rate
25
FIGURE 11
26
FIGURE 12
27
FIGURE 13
28
FIGURE 14
29
BEYOND THE SOUND BITES: THE REAL ECONOMIC PROGRAMS
OF JOHN MCCAIN AND BARACK OBAMA
Kevin Neuman, Ph.D.
Assistant Professor of Economics
Division of Business and Economics
University of Wisconsin – Stevens Point
INTRODUCTION
Each presidential election cycle has its own character and hot-button issues, derived
partly from the personalities of the candidates but also from the realities of the period. A
year ago it appeared that the 2008 election would be a referendum on the resolution of
the war in Iraq and that national security issues would once again carry the day. Today
rising energy prices and the mortgage crisis have pushed economics to the forefront,
with John McCain and Barack Obama charged by their parties to address the concerns
of voters. A recent New York Times/CBS News poll clearly shows this shift in voter
priorities with 40% of those polled citing the “economy and jobs” as their greatest
concern, and an additional 15% citing the economic issue of “Gas prices, energy
policy”. At the same time, only a combined 24% of those polled considered the “War in
Iraq” (15%) or “Terrorism, national security” (9%) to be their top priority. The poll
numbers show that “voters are more negative about the condition of the nation’s
economy this election year than they have been at any time since 1992” (Cooper and
Sussman, 8/21/08). As such the economic platforms of each candidate have been
receiving increasing attention as the election enters the homestretch.
Unfortunately, past experience suggests that voters can be assured of two things about
the 2008 election: the candidates will disagree. Each candidate will have their positions
distorted by the other. This report attempts to cut through this election year fog by
revealing the real economic programs of Senators John McCain and Barack Obama.
To accomplish this task the paper first lays the ground work for the analysis by
examining the economic theory behind the candidates’ positions. It next examines some
specific components of the platforms related to economic stimulus, tax policy, fiscal and
spending policy, mortgage reform, and health care. While this is by no means a
comprehensive list, these components are areas which highlight the major
disagreements between the candidates. The final section concludes the report.
IN SEARCH OF PLATFORM SUPPORT: THE ECONOMIC THEORY
If asked to describe the economic policies of Republican John McCain or Democrat
Barack Obama, it is likely that many people would respond based on the common
stereotypes of the two parties. Republicans of course are the fiscal conservatives,
working to balance the budget and stimulating economic growth through tax cuts.
Democrats on the other hand are the interventionists, raising taxes to pay for increased
government spending and more extensive regulation. In more technical terms the
debate has the Republicans carrying the flag for the neoclassical supply side
economists with the Democrats posing as the poster children for Keynesian economists.
30
While clearly a simplification of reality and generally outdated, each of these
stereotypes has a well-rounded, supporting economic theory and ideology which at
times has matched the actual policies quite closely. In short, supply side economists
believe in free markets. Open competition between self-motivated individuals and
businesses will allocate scarce resources efficiently as those with more valuable uses
for the resources should be willing to pay more for them. Primarily government’s role in
the economy is simply to stay out of the way. Governments also can encourage growth
by providing incentives that influence individuals and businesses to act in a way which
will not only benefit themselves, but also the economy as a whole. By and large they
take the form of tax cuts, which provide financial incentives to targeted groups without
interfering with or regulating the market in any way. The tax cuts simply change the
relative profitability of different actions in the market. While tax cuts are not uniquely
advocated by the supply-siders to stimulate economic activity, the types of tax cuts
distinguish the group. Rather than use taxes primarily to stimulate aggregate demand,
supply side economists believe that tax cuts encourage increased labor effort and
capital formation leading to greater stocks of capital and labor that increase aggregate
supply, thus avoiding the demand side’s tradeoff between unemployment and inflation.
Of particular interest to the supply-siders are tax rate reductions on corporate income,
capital gains, dividends, investment, and research and development as these create
incentives to save and expand businesses, driving the economy’s capacity outward.
Expanding economic capacity creates income not just for entrepreneurs, but also for
those now working in the growing businesses. As a convenient side effect, the tax cuts
should not even increase the budget deficit as surging economic activity expands the
base, offsetting declines in tax revenue from pre-existing sources. Supply side
economists do recognize that in the short run most of the tax incentives will tend to
benefit the wealthier segments of society because they are the individuals with money
to invest, but in the long run everyone will benefit from the overall economic expansion.
On the other hand, Keynesian economists view markets with more apprehension and
advocate a greater role for government in the economy. While the Keynesians do not
completely reject the efficiency aspect of markets, they believe that there are significant
imperfections in their functioning. Inspired by the events of the Great Depression,
Keynesians believe that unfettered capitalist economies will be subject to extensive
business cycles due to imperfectly functioning markets and human behavior. To
Keynesians the belief that the economy has a system of natural stabilizers is completely
wrong, as they see de-stabilizing elements deeply ingrained in the markets themselves.
However, Keynesians believe that the market economy can be managed by a watchful
government to capture the efficiency of markets without the devastating depressions.
Unlike the supply-siders, Keynesians believe that tax cuts can be an effective means to
increase personal income and aggregate demand rather than to encourage capital
formation. In addition, Keynesians advocate aggregate demand stimulation through
direct government spending to create jobs and replace the economic activity not being
provided by the private sector. To encourage capital formation, and stimulate
aggregate demand, Keynesians generally use interest rates as an incentive rather than
tax cuts. With respect to the budget, Keynesians believe that sometimes deficit
spending is necessary to stimulate aggregate demand, and that the deficit can be paid
31
for when the economy recovers. Keynesians do recognize that this type of intervention
in the economy requires a careful, watchful eye, but believe that government with its
elected officials and appointed experts is capable of playing this caretaker role.
The key question is whether these stereotypes match the actual policies of the
candidates and fairly represent their economic platforms. When one examines John
McCain’s policies, as I do later in the report, it appears that his economic platform does
seem to mesh relatively well with the supply side label. On the other hand, Barack
Obama’s policies seem to represent a less consistent ideology than the simple
Keynesian policies described above. In fact, while it can be argued that on social
issues Obama is more liberal than many in the Democratic Party, on economic issues
Obama in many ways appears much more conservative than other Democrats. This is
not to say that Obama has rejected government spending as an effective method of
economic stimulus, or that he believes all government regulation is distortionary and
should be repealed. As I will show in more detail, Obama’s policies do make use of
both of these methods and are cornerstones of his economic package. However,
Obama’s policies do reflect a much greater level of comfort with the functioning of
markets to reach favorable outcomes, a characteristic which seems to make some
fellow Democrats uncomfortable. Obama’s economic policies have even earned him
the label of a “University of Chicago Democrat” in reference to the market focused
economics traditionally championed by the institution as well as his time spent teaching
there (Leonhardt 8/24/08). But this philosophy is not due to a simple biographical link,
and is not a simple mix of economic ideologies. Rather the combination of market and
regulatory approaches suggests the influence of a third school of economic thought,
known as behavioral economics.
In general, behavioral economics is a market based approach to economic matters in
that it does not call for intrusive government regulation 1 . Where it differs from
neoclassical economics, likely due to its psychological roots, is in the deep questioning
of a primary assumption of the rational economic individual. Behavioral economists
recognize that individuals do not always make the “right” decision even when presented
with all the information and do not always act solely out of self-interest as the theory
says they should. For the behavioralists the challenge is to frame decisions or to give a
“gentle nudge” so that individuals freely make their own decision, yet that the decision
will tend to be the “correct” decision from the perspective of policymakers (Cassidy
6/12/08). As defined by two leaders in the field a “nudge, as we will use the term, is any
aspect of the choice architecture that alters people’s behavior in a predictable way
without forbidding any options or significantly changing their economic incentives” (as
quoted in Cassidy 6/12/08). This combination of market utilization and government
paternalism is the pragmatic mix of economic policy which makes some Obama policies
look stereotypically un-Democratic.
There are a few general principles which drive behavioral economics. One is inertia,
which is the general insight that individuals do not always change their behavior even if
1
For a more thorough discussion of behavioral economics and the policies the school of thought might put forth see
the book by Thaler and Sunstein entitled “Nudge: Improving Decisions About Health, Wealth, and Happiness”.
32
it is in their best interest. The key here is not to tell everyone what to do, but to make
the default choice the appropriate one for most of the people involved and for the
welfare of society. Another is the misuse of information when making decisions.
Behavioralists speak of “anchoring” which is the inability of individuals to let go of even
meaningless information and allowing it to influence a decision. Other examples are the
“availability heuristic” which is the use of the most obvious information to make a
decision even if it is not the most relevant and the “representativeness heuristic” which
is where individuals are influenced by non-existent patterns that they think they see
(Cassidy 6/12/08). The answer here again is not to fix decisions, but to make
information easy to understand and relevant so that individuals can make better
decisions on their own. These simple guidelines have shaped a number of Obama’s
policies which I will examine in more detail in the next section.
IN SEARCH OF VOTER SUPPORT: THE ECONOMIC PROGRAMS
With the simple descriptions of economic theory from the previous section in mind, I
now turn to specific components of the candidates’ plans. Before jumping into the
analysis, it is worth mentioning a difference in style between the campaigns. While both
candidates accuse the other of vague campaign promises, outside observers have
noted a “paper gap” in the McCain camp, referring to the relative lack of specific policy
papers detailing his proposals (Zenilman 8/2/08). While greater volume does not
necessarily make for better public policy, the lack of details does mean that interpreting
how McCain plans to accomplish his goals is more difficult. At the same time the flood
of detailed briefs from the Obama camp makes it difficult to discern which policies are to
be taken most seriously as it seems unlikely all are honestly expected to be
implemented. With this in mind I examine the candidates’ platforms relating to
immediate economic stimulus, tax policy, fiscal and spending policy, mortgage reform,
and health care. Specific details of the candidates’ plans are presented in Table 1.
Immediate Economic Stimulus
As the economic situation in the country deteriorated during the spring and summer,
how to stimulate the economy became a topic that the candidates increasingly had to
address. During the contentious Democratic primary season Hillary Clinton and Barack
Obama were more than happy to do so as the economy seemed to be a clear
weakness for the incumbent party. Not surprisingly Obama emerged from the contest
with a detailed plan to address the current economic conditions, which he updated
further as the summer progressed. On the other hand, John McCain, whose policies
more closely resemble those of George Bush, was more reluctant to outline a detailed
stimulus plan since such a plan implies the failure of Bush’s economic policy. As such,
McCain’s stimulus package is not as extensive as that of Obama.
Both plans focus on rising energy costs, although the candidates approach the issue in
different ways. From early in the spring McCain called for a suspension of the federal
gas tax, a repeal of the tax on imported sugar-based ethanol and a roll back on cornbased ethanol mandates which he blamed for higher corn and food prices. While
33
McCain’s cornerstone policy of a gas tax holiday may have been popular with voters it
was widely panned by economists of all persuasions as the reduction of the tax likely
would be captured by the oil companies and have little effect on price. Obama on the
other hand recently called for an energy rebate of $500 per individual and $1,000 per
family to be financed by a tax on so called windfall profits of oil companies. Calling the
rebate an “energy rebate” directs attention towards the concerns of voters although in
reality the rebate is similar to the rebate checks sent out by the government earlier in
the summer. In theory, if people spend the checks the economy would receive some
stimulus. Critics argue though, that while a tax on oil companies may be politically
popular, companies will simply pass the tax onto consumers through higher prices. To
the extent that this is possible, those who consume a disproportionate amount of oil
may actually see themselves hurt by the policy.
An interesting area where the candidates initially disagreed dramatically was
foreclosure assistance. Looking at Table 1 this may seem rather surprising as now the
candidates’ policies are actually rather similar, with both advocating renegotiation of
loans with varying degrees of public assistance. The main differences between the
plans are the eligibility requirements and the level of support, with Obama’s plan tending
to be more generous. The difference is that McCain initially declined to offer any
assistance in the crisis, saying that the market would correct itself by punishing those
who had made poor decisions. Although the stance likely seemed heartless to voters
the position was clearly in line with his economic ideology. After McCain received
enough pressure to finally offer a plan, he strongly emphasized that no speculators
would be helped by the program, a principle also advocated by Obama.
Obama clearly separates himself from McCain with the final segment of his plan which
calls for extensive government spending. The two packages of $25 billion given to
states to offset budget and infrastructure cuts are textbook government spending
stimulus designed to prop up aggregate demand. When combined with the tax stimulus
paid for by a regulatory style tax increase on a specific industry and a new government
assistance program, Obama’s plan is stereotypically Democratic in its ideology and
does not show much of the new thought that his other policies reflect. However,
Obama’s package does address the current economic situation to a much greater
degree and is likely to stimulate the economy much more than McCain’s plan. From a
political perspective Obama’s package is also likely to attract voters who believe the
economy is currently in a recession.
Tax Policy
Although the stimulus packages are highlighted in the candidates’ campaigns
(particularly for Obama) it is the candidates’ tax policy that reveals their long term plans
for the economy. It is also the candidates’ tax policy that we see the most consistent
representation of the candidates’ economic ideologies.
Not surprisingly, McCain’s platform details tax cuts of the supply side variety. The
cornerstone of the package is to extend President Bush’s tax cuts on personal income,
34
but also on dividends and capital gains, two taxes vilified by supply-siders as
disincentives to invest. McCain also plans new supply-side cuts, calling for significant
reductions to the corporate income tax and the estate tax. Two other notable moves to
encourage adoption of new technology are to expand and make permanent a credit for
R & D, and to allow first year expensing of equipment and technology investments, a
policy allowing companies to receive their tax breaks immediately rather than over time.
In moves designed to impact the middle class McCain also supports phasing out the
Alternative Minimum Tax (although his position on this has been inconsistent, shifting
from “eliminate” to “phase out” over the campaign). He also supports doubling the
dependent exemption. The only tax increase the campaign has mentioned is a vague
reference to the elimination of oil company exemptions, a policy which is likely more
political than economic. Overall McCain’s policies are consistent and for supporters of
the supply-side paradigm, right on track.
Obama’s plan also features a significant number of tax cuts although the focus is much
more on middle to lower income tax payers. Like McCain, Obama supports extending
Bush’s tax cuts for all but the top two tax brackets and supports permanent tax credits
for R & D, although the credits are less generous than those proposed by McCain.
Other cornerstone tax cuts or credits proposed by Obama are $500/$1,000 refundable
tax credits for individuals/families based on payroll taxes paid, exempting seniors with
incomes below $50,000 from paying taxes, a Universal Mortgage Credit to make it
easier for families to claim interest payments, and other expansions of current
programs. Obama has also advocated eliminating capital gains taxes for start-ups but
has not clearly defined how this would be determined. To pay for the cuts there are tax
increases as well. Along with the return to the higher rates for the top two tax brackets,
Obama also supports increasing the rate on dividends and capital gains to 20% for
those with incomes above $250,000, and a 45% top rate on estates above $7 million.
Like McCain, Obama also makes vague political promises to eliminate tax loopholes for
multi-national corporations and eliminate tax breaks for companies who send jobs
overseas. By targeting his tax cuts and making many credits refundable Obama has
shown that he plans to address the income inequality which he believes is a
fundamental problem in the country.
In their campaign rhetoric, Obama claims that he will cut taxes, while McCain’s
campaign repeatedly states that Obama will raise taxes. On the surface it would appear
that both of these claims cannot be true, but as in most political issues the answer of
who is correct depends on your perspective and how you define the issue. Clearly the
campaigns have differing views of what types of tax cuts should take place, but
according to the Tax Policy Center, a nonpartisan group which has conducted an
extensive analysis of both plans, both candidates would cut taxes overall, although
McCain would cut them by a greater amount. Looking at the distribution of tax cuts
however, Obama would cut taxes by a significantly larger amount for the bottom 80% of
the income distribution (Burman et al. 2008). From the perspective of the vast majority
of the population both candidates are tax cutters with Obama in the lead. On the other
hand, where McCain would cut taxes for all income quintiles, Obama does raise taxes
for the top quintile, and within the top quintile, particularly the top 1% of households
35
(Burman et al. 2008). From the perspective of the top earners, McCain’s claim about
Obama is correct as well. Whose policy is better depends primarily on your economic
ideology, and likely where you fall within the income distribution.
Both candidates’ tax plans also make efforts to simplify the system. McCain has
proposed an alternative system with only two tax rates and a generous standard
deduction. People could pay taxes under the simplified system or opt to pay under the
old system if they desired. McCain’s proposal rests on his belief that Americans do not
mind paying taxes but dislike the complexity of the IRS code. In Obama’s plan we can
see a bit of the behavioral economics ideology coming into play. Obama has proposed
a policy where individuals with simple returns would receive a pre-filled tax form based
on information the IRS already collects. Individuals could then simply verify and return
the form to file their taxes. What makes the policy a “nudge” as defined above is that
the current system is not altered in any way, nor is individual choice limited. Individuals
are still subject to the same tax code as before, and importantly, individuals can choose
to fill out their own forms if they wish. However, the default option will likely get more
individuals to file their taxes and file their taxes correctly. Rather than completely reform
the system like McCain’s policy would, Obama’s policy looks to frame behavior within
the framework that already exists.
Fiscal and Spending Policy
The questions that naturally arise from the candidates’ tax cuts are: What will they do to
the budget deficit? How do they intend to pay for them? In terms of a general fiscal
stance both candidates have said that they will cut deficits even while cutting taxes,
although McCain has taken a much stronger stance on the issue setting a 2013 date for
a balanced budget. Obama has stated that his policies are self-funding and will cut into
the deficit, but he has not given any specific dates for a balanced budget.
Presumably if the budget is going to be balanced and taxes are to be cut, the difference
must be made up by spending cuts. Each candidate has stated they intend to cut
earmarks: McCain through line-veto power and Obama by publicly disclosing earmarks.
McCain has also proposed a one year pause in discretionary spending to evaluate all
programs, something which will likely be very difficult to accomplish. Obama’s
centerpiece policies would put pay as you go rules into effect where any new spending
or tax cuts would have to be paid from somewhere else in the budget. He also calls for
competitive bidding for any contract above $25,000 to keep government accountable.
Obama has also promised to cut “wasteful” spending, which for him likely includes
spending in Iraq, while McCain has said that savings from victories in Iraq and
Afghanistan would go directly towards cutting the budget. Unfortunately it is very
difficult to definitively count on either of these areas as reliable spending cuts. Not
surprisingly, numerous observers have questioned the ability of either candidate to meet
their budgetary goals (Nicholas 7/8/08; Pear 7/8/08; Sasseen 8/7/08). Whether these
doubts will hurt the candidates politically is unclear, although given McCain’s firm stance
on balancing the budget doubts may raise greater skepticism by voters.
36
Mortgage Reform
One issue which has been somewhat new to this election, given events over the past
year, is mortgage reform. Both candidates have put forth policies to help with
foreclosures as discussed previously, but the crisis has spurred the candidates to
propose protections against future crises. Given the typical predilections of Democrats
this would seem like an obvious time for direct government regulation of the industry,
but Obama does not go this route. Instead the cornerstone of both campaigns is
information. McCain calls for greater transparency and accountability although he does
not outline how this would actually be implemented. Obama on the other hand has
advocated creating something called a Homeowner Obligation Made Explicit (HOME)
score to rate mortgages. The standardized HOME score would be mandated by the
government, and would have to be reported on all mortgage materials. However, the
proposal would not require companies to change the types of mortgages they offer as it
is recognized that unconventional mortgages may be good choices for some
consumers. The idea of the reform is simply that consumers when given better, more
relevant information will make better mortgage decisions. Once again the policy is
emblematic of a behavioral way of thinking. Rather than burden the industry with
extensive, expensive regulation, government steps in only to frame the information in a
better way. Consumers are pushed in the right direction by relevant information, but are
still free to make poor choices. Given concerns about the financial health of Fannie
Mae and Freddie Mac, it is likely that mortgage issues will be an important one for the
next President.
Health Care
A final issue which has been very important in the election is health care. The debate
has two areas of emphasis for both candidates: cost reduction and health insurance
provision. In terms of cost reduction, both candidates advocate similar proposals. Both
support reimportation of drugs, generic drugs (McCain through faster generic
introduction and Obama through greater use), deployment of modern information
technology, and greater transparency about treatment options, quality, and costs. The
candidates take slightly different approaches to manage costs. McCain puts more
emphasis on coordinated care as well as tort reform to protect doctors who follow
clinical guidelines. Obama on the other hand takes a more interventionist approach by
giving government the right to negotiate prices with drug companies and by forcing
insurers to pay a portion of premiums for patient care. Much of the concern over health
care inflation is over the accelerating cost of the Medicare program. As such, both
candidates have made cost reduction an important part of their health plans.
Turning to the health insurance provision side of the debate we see a greater
divergence in tactics. Consistent with his economic ideology McCain focuses on
competition and individual responsibility. A primary proposal is to allow greater
competition in the market by allowing individuals to buy policies across state lines.
McCain advocates competition to improve quality and variety as well, but he does not
delineate any specific plans. Perhaps the greatest reform by McCain would be to alter
37
the tax treatment of health insurance premiums. McCain proposes removing the
exclusion of employer-provided health insurance premiums from taxable income and
instead give a $2,500 refundable tax credit per individual for premiums paid. Analysts
have said that the $2,500 credit would initially be very generous particularly if the cost
reduction efforts were successful, although whether it would maintain its generosity
would depend on how the credit was indexed (Burman et al. 2008). The credit would
also apply to insurance purchased outside of the job, giving people greater choices as
well as helping alleviate the portability problems with health insurance.
Obama’s program reflects his mixed economic ideology as well, combining government
programs and mandates with the behavioral free choice approach. The primary focus
of the plan is to create a national health plan which could be purchased by those who
wished to do so, and to create a National Health Insurance Exchange (NHIE) which
would help individuals buy private health plans by evaluating plans and regulating their
quality and premiums. Obama’s plan would also mandate coverage for children and
forces employers with no meaningful coverage to pay into the NHIE. Despite the
government intervention Obama does keep a behavioral nuance to the program by not
mandating adults to buy coverage for themselves. Once again the logic is that if costs
are reduced and information about plans is available, individuals will tend to make the
appropriate choice and sign up for insurance. The proposal would also in theory
improve the variety of choices for individuals and would help with portability issues, but
critics have argued that the government portion of the program would still be too
expensive if costs did not actually go down as suggested.
As with the mortgage reform issue, grave financial issues within the Medicare system
are sure to make health care reform an important topic for many years to come. The
effectiveness of the cost reduction policies put into place by the winner will go a long
way towards determining what type of health care system we will see in the future.
CONCLUSION
While the above analysis is by no means a comprehensive list of all issues I believe that
they represent the most interesting examples of their economic ideologies. I have left
out other issues such as labor law reform, Social Security, and free trade, not because
they are unimportant, but because the candidates have generally toed the party line on
these issues. Likewise I have left out the candidates’ long term energy policies because
it is very unclear how much of them are actual reforms and how much are purely
political campaign promises. What should be said is that both candidates are trying to
paint clean and alternative energy reforms as job growth machines. The spin on the
energy issue displays the candidates’ efforts to combine the two most important issues
for many voters.
Overall the analysis suggests that McCain has stayed true to the recent supply-side
leanings of the Republicans which he has been able to clearly convey to voters, while
Obama has struggled somewhat to communicate his nuanced approach to voters and
even other Democrats. Whether either economic platform will actually be successful in
38
terms of the short or long run I leave to other analysts to determine. Part of the difficulty
in any analysis of the plans is that there is no way of knowing which reforms would
actually be successfully implemented, particularly for McCain who would likely face
Democratic majorities in the House and Senate. What can be said is whoever wins the
Presidency this November will face daunting challenges in the economy and must be
prepared to work with the other party to achieve solutions to very serious problems.
39
References
“Barack Obama’s Emergency Economic Plan”. 2008.
http://www.barackobama.com/2008/08/01/senator_barack_obama_announces.
php.
“Barack Obama’s Plan for a Healthy America”. 2008.
http://www.barackobama.com/pdf/issues/HealthCareFullPlan.pdf.
“Barack Obama’s Plan for Restoring Fiscal Discipline”. 2008.
http://www.barackobama.com/pdf/issues/fiscal/ObamaPolicy_Fiscal.pdf.
Burman, Len, Surachai Khitatrakun, Greg Leiserson, Jeff Rohaly, Eric Toder, and Bob
Williams. 2008. “An Updated Analysis of the 2008 Presidential Candidates’ Tax
Plans: Revised August 15, 2008”. Tax Policy Center Report.
Cassidy, John. 2008. “Economics: Which Way for Obama?”. The New York Review of
Books. Vol. 55(10): June 12, 2008.
Cooper, Michael and Dalia Sussman. 2008. “Voters in Poll Want Priority to Be
Economy, Their Top Issue”. The New York Times. August 21, 2008.
“Jobs for America: The McCain Economic Plan”. 2008.
http://www.johnmccain.com/Issues/jobsforamerica/
“Keeping America’s Promise: Strengthening the Middle Class”. 2008.
http://www.barackobama.com/pdf/issues/economy/Obama_Keeping_Americas_
Promise.pdf.
Leonhardt, David. 2008. “How Obama Reconciles Dueling Views on Economy”. The
New York Times Magazine. August 24, 2008.
Nicholas, Peter. 2008. “Adding up the Cost of Obama’s Agenda”. The Los Angeles
Times. July 8, 2008.
Pear, Robert. 2008. “Skepticism on McCain Plan to Balance Budget by 2013”. The New
York Times. July 8, 2008.
Sahadi, Jeanne. 2008. “McCain Outlines Plan for Economy”.
http://money.cnn.com/2008/04/10/news/economy/mccain_econ_plan/index.htm.
Sasseen, Jane. 2008. “Why Their Economic Plans Don’t Add Up”. Business Week.
August 7, 2008.
Zenilman, Avi. 2008. “McCain’s Camp Suffers from a Paper
Gap”. http://www.politico.com/news/stories/0708/12215.html.
40
Table 1: Candidate Economic Programs
McCain
Immediate
Economic
Stimulus
Obama
Gas and Food prices:
-
-
-
Gas prices:
Suspend 18.4 cent per gallon
federal gas tax and 24.4 cent
per gallon diesel tax
Repeal 54 cent per gallon tax
on imported sugar-based
ethanol
Roll back corn-based ethanol
mandates
-
Foreclosure Assistance:
-
Foreclosure Assistance:
-
HOME plan for eligible
homeowners to trade subprime mortgage for 30 year
fixed rate mortgage
-
-
Cuts and Credits:
-
-
-
$10 billion fund to help
homeowners renegotiate their
loans possibly through public
agencies
Spending:
-
Tax Policy
Energy rebate of $500 per
individual paid for by tax on
windfall profits of oil companies
($1,000 per family)1
$25 billion to State Growth
Funds to offset state budget
cuts for services1
$25 billion to Jobs and Growth
Fund to offset state cuts in
infrastructure and school
repairs1
Extended and expanded
Unemployment Insurance
benefits
Cuts and Credits:
Extend Bush tax cuts on
personal income and keep
15% tax rate on dividends and
capital gains
Cut top corporate tax rate from
35% to 25%
Phase out Alternative
Minimum Tax
Double personal exemption for
dependents from $3,500 to
$7,000
Reduce estate tax to 15% with
$10 million exemption
Permanent credit for 10% of
wages spent on R & D
41
-
-
-
-
-
Extend Bush tax cuts on
personal income for all but top
two brackets2
$500/$1000 refundable tax
credit offsetting payroll taxes for
individuals/families
Expand and make refundable
Child and Dependent Care Tax
Credit
Exempt seniors making less
than $50,000 from income
taxes
Make R & D credit permanent
Universal Mortgage Credit of
10% of interest (up to $800)
Table 1 (cont.): Candidate Economic Programs
McCain
Tax Policy
(cont.)
Cuts and Credits (cont.):
-
Obama
Cuts and Credits (cont.):
First year expensing of
equipment and technology
investments
-
Eliminate capital gains taxes for
start-ups
Expand Earned Income Tax
Credit
Increases:
-
Elimination of oil company
exemptions2
Simplifications:
-
Increases:
-
Simplified, optional alternative
system with generous
standard deduction and two
rates
-
-
Restore top personal tax rates
to 36% and 39.6%2
Restore 45% estate tax rate for
estates over $7 million2
Increase rates on dividends
and capitals gains to 20% for
incomes above $250,0002
Eliminate tax loopholes for
multi-nationals
End tax breaks for companies
that send jobs overseas
Simplifications:
-
Fiscal and
Spending
Policy
Overall Fiscal Policy:
-
Pre-filled forms from IRS for
simple filings that can be
verified and returned
Overall Fiscal Policy:
Balance budget by 2013
-
Deficit reduction without
specific dates
Spending Plans:
-
One year discretionary
spending pause for review
Eliminate earmarks with lineitem veto
Reserve savings from victory
in Iraq and Afghanistan for
deficit reduction
Spending Plans3:
-
-
42
PAYGO rules enforced
Eliminate earmarks through
public disclosure
Make government more
accountable by bidding out
contracts over $25,000
Cut “wasteful” spending
Table 1 (cont.): Candidate Economic Programs
McCain
Mortgage
Reform
Mortgage Reform:
-
Health
Care
Mortgage Reform
Promote greater transparency
and accountability
Department of Justice task
force to investigate fraud4
Cost Reduction:
-
Obama
-
-
Mandated standardized
Homeowner Obligation Made
Explicit score to rate mortgages
STOP FRAUD Act to fight
mortgage fraud
Cost Reduction:
Reimportation of drugs
Faster generic introduction
Coordinated care
Deployment of information
technology
Tort reform to protect doctors
who follow clinical guidelines
Transparency about treatment
options, quality, and costs
-
Reimportation of drugs
Increased use of generics
Government right to negotiate
with drug companies
Force insurers to pay portion of
premiums for patient care
Deployment of information
technology
Transparency about treatment
options, quality, and costs
Health Insurance:
-
-
Lower prices through
competition and ability to
purchase insurance across
state lines
Establish refundable tax credit
of $2,500 per individual for
insurance and include
employer sponsored health
insurance premiums as
taxable income
Health Insurance:
-
-
Mandate coverage for children
Establish national health plan
for those who wish to purchase
Establish National Health
Insurance Exchange to help
individuals buy private plans
Employers with no meaningful
coverage must contribute to
NHIE5
Note: All information for McCain was taken from: “Jobs for America: The McCain Economic
Plan” and all information for Obama was taken from: “Keeping America’s Promise:
Strengthening the Middle Class” except where noted.
1
“Barack Obama’s Emergency Economic Plan” 2008
2
Burman et al. 2008
3
“Barack Obama’s Plan for Restoring Fiscal Discipline” 2008
4
Sahadi 2008
5
“Barack Obama’s Plan for a Healthy America” 2008
43